by Al MartinGo Short, Young Man!
(2-27-14) In the olden days, the smart money advice was “Go West, Young Man” because of the perception that opportunity awaited those who ventured to the western region of the United States. Today in the crumbling global economic environment, the smart money advice would be “Go Short, Young Man.” Here’s why --
Now we are in a time of consistently poor economic data in everybody’s calendars – Asia, the United States and Europe – where the global markets are entering what’s called a speculative blow-off phase.
Classically a speculative blow-off of speculative bubbles is what occurs at the end of a run-up. There was an upside blow-off that occurred in September 2007 on Labor Day and the same phenomenon occurred in the blow-off of 2000. That was a little different because the blow-off occurred in the NASDAQ Index while the broader markets the Russell and S&Ps actually continued to rise marginally until they blew off in August of 2000. Once again the speculative fervor is being led by the techs and bio-techs, as they are called.
The significance of a blow-off is that we are coming to the end of the post-March 2009 so-called recovery period, the cyclical bull market within the greater secular bear market. In other words, we are coming to the end of that bull market. The “sugar” (QE) can’t feed it anymore with the Fed now “tapering,” while the Europeans and the Japanese who claim they are going to come in with more “sugar” haven’t – and they’re dragging their feet on more “sugar.”
The so-called “sugar high” is coming to an end. This portends a deflationary cycle, as we see that the central bank governors around the planet are concerned about growing deflation and the fact that they have quadrupled on average their balance sheets since March of 2009, they have yet to create any inflation.
The reason that cheap and easy money keeps getting pumped into markets by central banks is to raise asset prices after the March 2009 bottoms were reached. Then we saw a bottom in equities and successive bottoms in other asset classes over the following year as global banks – the Fed, ECB, Bank of England and Bank of Japan -- put the pedal to the monetary metal, as it were, and began cranking up the printing presses. This doesn’t mean they print more money as the Unwashed seem to think. It means they began repurchasing ever larger quantities of the sovereign Treasury bonds they are selling in the open marketplace.
For example, the Fed in QE 3, the last Quantitative Easing – another shot of “sugar” – ended up buying 2/3 of all of the new US Treasury bonds within the 5-30 year spectrum it was issuing. The ECB and the Bank of Japan did the same – to create a scarcity in bonds and force down the yield which is what happened. This however did not lead to sufficient increases in GDP to create inflation because the problem the central banks inherited from the 1st quarter of 2009, namely “excess manufacturing capacity” was never surmounted. Capacity utilization numbers in a rising GDP should increase to something north of 85% and closer to 90%. However they have remained weak. Why? Because retail sales never recovered to the extent that they had in the past when monetary stimulus was applied. People didn’t spend enough money on goods and services wearing their hats as consumers. And they came out of the 2007 break with record debt levels.
Even though those debt levels were worked down by 2011 – as the shills like to point out – per capita debt levels were half of what they were in 2006. Now the aggregate debt level is $11.5 trillion. Per capita debt level is as high as it was at the peak of the speculative bubble in 2007.
The bottom line to all this is that the “sugar” isn’t working anymore. It’s not creating any further growth in GDP and it is not increasing consumption.
Without an increase in consumption, economies remain slack. Production slacks in economies. That’s what the capacity utilization numbers are telling you. Without that pick-up in end consumption, you’re never going to create inflation.
Despite what some internet writers may believe, you’re never going to go from a deflation to a hyper-inflationary environment overnight. The only way that happens is if currencies simply collapse. What we will see, as we did in 2009, is a continuation of a global race to the bottom. All of the countries are acting to cheapen their currencies as much as possible but none of it has been successful. Total exports on the planet since the 2009 lows are actually less than it was before. Cheap money in other words has not worked to do what it classically does – increase global export trade and create inflation.
The significance for Joe Six Pack is that Joe is plowing money into common stock funds and index funds like there’s no tomorrow since 2009 -- just as they did in the 2004 -2008 period and then got one helluva wiping.
So what is the Big Smart Money doing? George Soros has increased his short position. Meanwhile Joe Six Pack Working Republican money is all long.
The so-called Doomsayers like Marc Faber are saying that there might be as much as a 50% decline in equities. That’s entirely possible and very likely. We will certainly give up half of the gains that we have seen since the March 2009 lows in the S&P at 666 and now trading up at the all time high of 1848. The markets have nearly tripled since 2009 The tripling has come because of “sugar” – cheap easy money. It wasn’t because of the expansion of earnings by companies in these indexes. That’s why the Price/ Earnings ratio (P/E) continues to go up. In a healthy market, that should move south.
So if Joe Six Pack wasn’t taking advantage of the cheap easy money, who was? It was brokerage firms and insurance firms, but of course it’s not available to Joe. Nor should it be. For everything to work the way it’s supposed to work, as Larry Kudlow points out quite correctly – that’s why Bullish Shills exist -- you need Joe Six Pack putting money into his 401 K or IRA every month since he doesn’t know anything about markets. That is the bedrock of the market.
People ask me – will it continue? Yes, because there’s no reason for it to change – and there isn’t any alternative.
We’re entering into a new age where the old system non-contributory defined pension plans are going the way of the dinosaur. The problem is that what the numbest of the Joes always relied on – those who knew nothing about markets and economics -- are now being forced to open 401 Ks and IRAs for the first time because they don’t have the same pension systems in place.
Then there’s Obama’s MyRA scheme which is targeted at the bottom 50% of the population who have suffered proportionately the greatest losses in these defined pension systems because they’ve been kicked out of them. People that used to employ them don’t have these plans anymore.
With the MyRA plan, Obama is attempting to address one of the future time bombs. This is just one of a series of future time bombs. One of them relates to Obama’s constituency which is that the bottom 50% on a percentage basis who had these pension plans – which they don’t have anymore.
The plan is to have these economically lower 50% to buy US Treasury Bonds. They’re making the contributions and it can be as low as $50 a month. But it’s not going to work of course because the population this is being marketed to doesn’t have any money.
What’s interesting is that at least from a progressive liberal regime is a recognition of one of the future time bombs. It’s not going to help anyone but at least he gets to pay political lip service to the problem which he’s trying to capitalize on. It’s meaningless like all political lip service is but he can say I’m just trying to address a future time bomb that I know my constituency represents.
His target audience – the bottom 25% of the people in the United States which are the heart of the Obama constituency have never even had a bank account. They are essentially off the grid because they don’t know anything about it.
So what now? The “sugar” isn’t working. The Fed understands that and that’s why the Fed has been the first to taper. What Faber and those of his ilk believe that the Fed will stop tapering but actually increase the amount of “sugar”—I wouldn’t bet on that happening. The problem is that they have 4 years of injecting the “sugar” which haven’t accomplished the goals they expected to be accomplished. It has raised asset prices, which was one of the goals – but it hasn’t created any inflation. It hasn’t created any new employment. The only thing it’s managed to do is increase the indebtedness of the Unwashed back to pre-speculative levels.
Consequently 2014 is a debacle in the offing. We knew a debacle was coming but we didn’t know what year -- whether it would be 2015 or 2016. It would now appear that 2014 is going to be a repeat of 2008 – another debacle-icious year.
So what are the indicators? Markets in the United States, Europe and Asia try to push into new highs -- yet get turned back. Total volume in markets is diminishing. Commodity prices are now so far beyond their underlying supply/ demand fundamentals because they are supported by cheap and easy money and continuous injections of money into these commodity ETFs by people who don’t know anything about markets or economics.
It’s not time to be shaking in your boots. It’s time to be short.
I’m trading the S&Ps from the short side. I’m trading virtually all of the commodities from the short side – despite the recent increase you’ve seen in the soft and tropical commodities which is largely weather-related.
An interesting statistic – in 2014 this planet will produce more commodities than it has ever produced before – in everything. Not just cereal grain or coffee and sugar – the cyclical soft commodities. It will produce more gold, more silver, and more nickel.
We already have bulging inventories of oil on the planet, which are going to increase even more. We have record surpluses of copper and some of the other industrial metals. These surpluses will continue to grow. Despite the move up in sugar, there is still a global sugar glut. The global corn glut will increase this year due to record crops.
The old trader’s adage should be remembered—the best cure for high prices is high prices – when it comes to commodities.
So remember – go short, young man…

* AL MARTIN is an independent economic-political analyst with 25 years of experience as a trader on NYMEX, CME, CBOT and CFTC. As a former contributor to the Presidential Council of Economic Advisors, Al Martin is considered to be a source of independent analysis for financially sophisticated and market savvy investors.

After working as a broker on Wall Street, Al Martin was involved in the so-called "Iran Contra" Affair as a fundraiser for the Bush Cabal from the covert side of government aka the US Shadow Government.

His memoir, "The Conspirators: Secrets of an Iran Contra Insider," (http://www.almartinraw.com) provides an unprecedented look at the frauds of the Bush Cabal during the Iran Contra era. His weekly column, "Behind the Scenes in the Beltway," is published weekly on Al Martin Raw.com, which also publishes a bimonthly newsletter called "Whistleblower Gazette."

Al Martin's new website "Insider Intelligence" (http://www.insiderintelligence.com) will provide a long term macro-view of world markets and how they are affected by backroom realpolitik.